More re: National Debt

Just after I finished my Background Info on National  Debt post, I ran across this from James Galbraith at New Deal 2.0. He does a nice job of pointing out some of the errors of the “oh-my-god-the-deficit-is-going-to-destroy-us-if-we-don’t-cut-grandma’s-social-security” crowd. For  those not aware, Pete Peterson is a billionaire that has spent millions trying to frighten people with the deficit and persuade people to cut government spending benefits to people less fortunate than him. He paid for a substantial portion of the Obama Bi-Partisan Commission on Fiscal Responsibility – the ones who recommended cutting Social Security, a sound healthy program. He has also contracted with Columbia Univ. Teachers College to produce propaganda “educational materials” for elementary school children about the national debt, or at least as Peterson understands the debt. Of course, as we learn from Galbraith, Peterson and his foundation don’t really understand it very well:

Economist James K. Galbraith goes behind the scenes at a Pete Peterson gathering of deficit hawks to see what they have to say.The Fiscal Solutions Tour is the latest Peter G. Peterson Foundation effort to rouse the public against deficits and the national debt — and in particular (though they manage to avoid saying so) to win support for measures that would impose drastic cuts on Social Security and Medicare. It features Robert Bixby of the Concord Coalition, former Comptroller General David Walker and the veteran economist Alice Rivlin, whose recent distinctions include serving on the Bowles-Simpson commission. They came to Austin on February 9 and (partly because Rivlin is an old friend) I went.

Mr. Bixby began by describing the public debt as “the defining issue of our time.” It is, he said, a question of “how big a debt we can have and what can we afford?” He did not explain why this is so. He did not, for instance, attempt to compare the debt to the financial crisis, to joblessness or foreclosures, nor to energy or climate change. Oddly none of those issues were actually mentioned by anyone, all evening long.

A notable feature of Bixby’s presentation were his charts. One of them showed clearly how the public deficit soared at the precise moment that the financial crisis struck in late 2008. The chart also shows how the Clinton surpluses had started to disappear in the recession of 2000. But Mr. Bixby seemed not to have noticed either event. Flashing this chart, he merely commented that “Congress took care” of the budget surplus. Still, the charts did show the facts — and in this respect they were the intellectual highpoint of the occasion.


A David Walker speech is always worth listening to with care, for Mr. Walker is a reliable and thorough enumerator of popular deficit-scare themes. Three of these in particular caught my attention on Friday.

To my surprise, Walker began on a disarming note: he acknowledged that the level of our national debt is not actually high. In relation to GDP, it is only a bit over half of what it was in 1946. And to give more credit, the number Walker used, 63 percent, refers to debt held by the public, which is the correct construct — not the 90+ percent figure for gross debt, commonly seen in press reports and in comparisons with other countries. The relevant number is today below where it was in the mid-1950s, and comparable to the early 1990s.

But Mr. Walker countered that fact with another, which I’d never heard mentioned before: in real terms he said — that is, after adjusting for inflation — per capita national debt is now twice what it was back then.

The problem is that real per capita national debt is a concept with no economic meaning or importance. (No government agency reports it, either.) Even in the private sector, debt levels matter only in relation to income and wealth: richer people can (and do) take on more debt. Real per capita national income is well over three times higher today than it was in 1946 — so how could it possibly matter that the “real per capita national debt” is twice as high?

Next, Mr. Walker made a comparison between the United States and Greece, with the implication being that this country might, some day soon, face that country’s interest costs. But of course this is nonsense. Greece is a small nation that has to borrow in a currency it cannot control. The United States is a large nation that pays up in a money it can print. There is no chance the markets will mistake the US for Greece, and of course they have not done so.

Finally, Mr. Walker warned that “foreign lenders… can’t dump their debt but can curb their appetite” for new US Treasury bonds. This was an oblique reference to the yellow peril. The idea, when you think about it, is that the Chinese central bank will acquire dollars — which it does when China runs an export surplus — and then fail to convert them into Treasury bonds, thereby choosing, voluntarily, to hold dollars in cash, which earns no interest, instead of as Treasury bills, which do. Mr. Walker did not try to explain why this would appeal to the Chinese.

Walker closed by calling for action tied to an increase in the debt ceiling; specifically for a hard cap on the debt-to-GDP ratio with “enforcement mechanisms,” which could include pro rata cuts in Social Security and Medicare benefits and tax surcharges. He did not specify whether the cap should apply to gross federal debt or only to that part of the debt held by the public (a number which the Federal Reserve can change, any time it wants, by buying or selling public debt). When pressed, in the question period, he would not even say what he thought the cap should be.

I waited for Ms. Rivlin to add something sensible. But she did not. Apart from some platitudes — she favors “serious tax reform” and “restructuring Medicare” — her interesting contribution was to restate Mr. Walker’s comment about “foreign lenders,” who might say “we’re not going to lend you any more money.” That this would amount to saying “we’re not going to sell you any more goods” seems — from a question-and-answer and brief exchange afterward — genuinely not to have crossed her mind.

The Fiscal Solutions Tour comes with a nice brochure, and even (in my case) with a flash drive containing Mr. Bixby’s powerpoints. But does Mr. Peterson think he’s getting his money’s worth? The President, in his State of the Union, mostly ignored him. The Bowles-Simpson effort (which he paid for in part) and the closely allied Rivlin-Domenici plan are fading from view. And as the House Republicans forge their own course, demanding radical spending cuts right now — for political rather than economic reasons, which they don’t even bother to explain — the tired and shabby arguments of these old deficit-worriers hardly seem connected, any more, to the battles at hand.

James K. Galbraith is a Vice President of Americans for Democratic Action. He is General Editor of “Galbraith: The Affluent Society and Other Writings, 1952-1967,” just published by Library of America. He teaches at the University of Texas at Austin.

Background Info on U.S. National Debt

This is another post in response to a student request.  Here are some links that provide background information about the U.S. national debt.

First, the definitive sources:

  • for the exact amount of debt by year:  U.S Treasury Direct – Reports:
    • this site also has links, graphs, charts on the makeup of the debt by maturities, interest rates, types of bonds, etc.  Even has detailed info on U.S. Savings Bonds
  • for the official story of how the debt happened, how it was managed throughout U.S. history: U.S. Bureau of Public Debt – a series of 6 pages, covering the whole history.
  • for some more facts, graphs, and some analysis: see Wikipedia:
    • Be warned, however, the Wikipedia article repeats a lot of commonly believed, but factually incorrect statements such as “spending must be financed by borrowing” and that “entitlement spending such as Social Security” pose a “risk” – see below.
  • for a decent, factually correct analysis, albeit a politically biased toward progressive policies analysis see:  Z Facts – – several other links and pages explaining some misconceptions

Overall, anybody researching or thinking about the U.S. national debt, should keep in mind that there’s a LOT of nonsense circulating about U.S. government debt. To correct these misconceptions, keep in mind the following:

  • Debt is the accumulation of past deficits, if those deficits were “financed” with borrowing. Deficits are the difference between government money-in and money-out. Money-in is Taxes. Money-out is GovSpending + GovTransfers. If money-out exceeds money-in, you have a deficit.
  • Deficits do not necessarily have to be “financed” by borrowing, but the U.S. government has long voluntarily followed a policy of borrowing each year to cover the deficit, although it doesn’t necessarily do so month-by-month. The alternative to borrowing to “finance” a deficit in a modern system is to issue checks to pay for spending and let the central bank (Federal Reserve) create bank reserves when the checks are cashed.
  • Any analogy between a household’s finances and the national government is false. There is no such valid comparison.
  • As long as a national government issues it’s own currency, that currency is not fixed in value (convertible) to anything else (other currency or gold), and the government borrows in it’s own currency, then it cannot default or go “bankrupt” or “insolvent” unless it voluntarily chooses to do so to screw the bondholders. This applies to US, Australia, Japan, UK, Canada, etc, but not to countries inside the “eurozone” – they don’t have their own currency.
  • National deficits, and hence debt, almost always goes up during a war. Vietnam war was a bit of exception.
  • When comparing debt levels between different years/eras, it is critical to adjust for:
    • inflation – use “real dollars” or “constant x year dollars” if looking at the debt in dollars
    • size of population and the economy. –  The best measure of the relative size of the debt is: debt-to-GDP ratio.
  • Three things that really balloon the size of deficits and hence debt levels:
    • War
    • Depression or recession – since tax receipts are generally based on economic activity (income tax), anything that slows the economy slows tax collection and raises the deficit.
    • Major income tax cut programs when combined with major new spending intiatives.  This was rare in early US history, but big in Reagan years and Bush II years.
  • One thing that really reduces deficits and hence, slows the growth of debt:
    • a growing economy, especially as it nears full employment (explains Clinton years)
  • Government bonds/debt is NOT a “burden” on children or grandchildren.  It does not have to be paid back. If the borrowed money is spent on things that improve or stimulate econonic growth, then the “children” and “grandchildren” inherit a larger, more productive economy that can pay for the debt interest.
  • Government bonds are not really like household debt or corporate debt, or even state-government debt. The best way to think about government bonds is that they are just like currency except they pay interest.
  • It is possible to have too little national debt. Banks in particular need to have a certain amount of government bonds among their “assets” because they provide a liquid asset.  In recent years, the Australian government, when running a series of surpluses was asked by the banking community to issue new bonds anyway.

I have more on the national debt and those promoting the idea that the debt is the number one problem in U.S., on tax cuts, deficits, and debt, and on how the U.S. cannot go “bankrupt”.